Credit Repair and Bankruptcy

A Changing World

Bankruptcy is not as an attractive as it once was. Many people attempting to discharge debts in a Chapter 7 bankruptcy are now forced into a Chapter 13 repayment plan. Many more are discovering that do not qualify at all. Let’s take a look at the new bankruptcy laws as well as some credit repair strategies that will help you minimize the damage to your credit report.

2005 Changes

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 set up a gamut of barriers designed to disqualify applicants from discharging debt in a Chapter 7 bankruptcy. Those that no longer qualify for a Chapter 7 bankruptcy may be forced into a Chapter 13 repayment plan. Prior to 2005 individual cases were examined and judged on a rather subjective basis; post-BAPCPA applicants are subject to more restrictive guidelines, the first of which is a means test.

Chapter 7 Means Test

If your income is below the median income in your state you automatically qualify for Chapter 7. If your income is above the median you must calculate your disposable monthly income (DMI) to determine whether you a capable of making payments on your debts sufficient to qualify for Chapter 13. Your DMI is calculated by subtracting certain allowable expenses from your monthly income. If the DMI is less than $100 per month, you are permitted to file under Chapter 7. If the DMI is above $100, you must instead file under Chapter 13. Please note that there are exceptions to these rules, so please consult an attorney before making a decision.

Additional Requirements for Filers

There are a number of additional requirements that make the process of bankruptcy more difficult including mandatory credit counseling from an approved credit counseling agency prior to filing, as well as a course in personal financial management after filing the bankruptcy. If you end up in a Chapter 13 plan the new law increases the amount of debt that you will repay, and the old "super discharge" provision, which allowed the discharge of some debt under Chapter 13, has been significantly cut. Another major restriction is a new $150,000 cap on the amount of equity in your home that you can exempt from creditors claims.

Credit Repair Solutions

If you do qualify, and subsequently file bankruptcy, there is quite a bit you can do to mitigate the damage to your credit report. First, let’s take a look at the Fair Credit Reporting Act (FCRA) and then discuss the credit repair strategies that will help you repair your credit after your discharge.

Bankruptcy, Credit Repair, and the FCRA

The only reference to bankruptcy in the FCRA is as follows: § 605. Requirements relating to information contained in consumer reports [15 U.S.C. §1681c] (a) Information excluded from consumer reports. Except as authorized under subsection (b) of this section, no consumer reporting agency may make any consumer report containing any of the following items of information: (1) Cases under title 11 [United States Code] or under the Bankruptcy Act that, from the date of entry of the order for relief or the date of adjudication, as the case may be, antedate the report by more than 10 years.

Bankruptcy and the Credit Bureaus

Fortunately, the story does not end there. A critical distinction that many people miss as they consider their credit repair options is that the accounts included in bankruptcy are subject to all of the FCRA stipulations about accuracy quite separate from the issue of the reference to bankruptcy as a public record. In addition, the credit bureaus have their own internal policies about the reporting of accounts after discharge. And here is where your opportunity for credit repair really shines.

Credit Repair Strategy

The credit bureaus operate with an implicit understanding that once an account is discharged in bankruptcy it enters a new phase which nullifies its status prior to discharge; a discharged account, by definition, cannot be in collection, or with a past due balance. Discharge modifies the condition of the account as well as the legal relationship between creditor and debtor forever. The approach adopted by the credit bureaus for all items discharged in a bankruptcy is to remove all defunct derogatory information and to insert a single information line stating that the account was included in bankruptcy. But credit repair will not happen without your participation.

The Credit Repair Plot Thickens

It is crucial to know that you must initiate the restatement of discharged items on your report. The credit bureaus will not correct your report without receiving specific instructions from you. Too many people make the mistake of believing that these things will take care of themselves without attention. There is no reason that you should suffer from bad credit for years after a bankruptcy. An intelligent credit repair effort can eliminate the majority of score damaging information and get you back on your feet before you know it.

Copyright © 2007 James W. Kemish. All Content. All Rights Reserved.